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Austin BlackSep 8, 20222 min read

Penetration pricing strategy and when to use it

What is penetration pricing strategy?

Penetration pricing strategy is a pricing strategy whereby a company sets a low initial price for a product or service in order to gain market share. The goal of penetration pricing is to achieve a high market share by offering a product or service lower in price than the competition. Think of some of the most famous loss leaders of our day. Companies like Uber, Netflix, Amazon, and Instacart all employed penetration pricing strategies on their path to profitability.

What are the benefits of a penetration pricing strategy?

There are several benefits to using penetration pricing as a pricing strategy. First, by setting a low initial price, a company can quickly gain market share, which can be beneficial if the company plans to raise prices later. Second, penetration pricing can help a company build brand awareness and create customer loyalty. Third, penetration pricing can be used to test the market for a new product or service. If the product or service is successful, the company can then raise prices assuming they have price elasticity.

What are the drawbacks of penetration pricing strategy?

There are also several drawbacks to using penetration pricing as a pricing strategy. First, by setting a low initial price, a company may not generate enough revenue to cover its costs. Second, penetration pricing can lead to losses in the short term as the company ramps up production or marketing efforts. This is where venture capital or private equity funding come in, enabling unprofitable companies to operate as they achieve market penetration and scale. Third, penetration pricing may tempt competitors to lower their prices, which can lead to a price war. You don't want to get caught in a race to the bottom.

Whether penetration pricing is the right strategy for your company depends on your goals and objectives. If you are looking to gain market share quickly, penetrate new markets, or build brand awareness, then penetration pricing may be the right choice for you. However, if you are looking to generate immediate profits, you may want to consider a lower risk and more profitable route.

If you are currently considering different pricing strategies for your product and want to see how your competitors are pricing their products, including real time changes to those prices, request a demo of Wide Narrow to see how we can help you monitor your competitive landscape.